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Monthly Archives: February 2014

Packaged goods companies aren’t the only ones that can profit from added attention to superconsumers. Several years ago we worked with a U.S. hardware store chain (unnamed for reasons of client confidentiality) whose sales were lagging. Its superconsumers were do-it-yourselfers making low-cost home improvements, such as replacing light fixtures. In analyzing how to increase sales among them, managers focused on paint—a high-margin product that is part of many DIY projects, an easy way to spruce up a space, and a purchase for which customers appreciate the kind of advice and personal service that’s hard to get at a big-box store.

The retailer reworked its paint merchandising and marketing to be more inspiring. For example, it created “idea cards” and began offering sample jars so that customers could try out colors at home for little cost. These initiatives succeeded, and not just among superconsumers: Paint sales rose 14% the following year.

Vic Bhagat, global chief information officer of EMC Corporation, keeps a close watch on his Mercedes parked in his garage in the US even when he is in a meeting in Bangalore. He pulls out his iPhone and clicks on an app to see if anyone is tampering with his car or taking it for a spin. “It allows me to track my car. I have kids who don’t drive yet, but it is a great safety feature to know where my car is,” says Bhagat. He can even start and switch off his car while sitting in India. Mercedes gave him the app when he bought his car.

Bhagat is convinced that apps will increasingly be part of our everyday lives — at work and at home. “The future is mobile for every corporation and consumer,” he adds.

Somakumar Kolathur and Sreekumar Paramu, both former Infoscions, are as bullish about apps as Bhagat is. They quit stable jobs at the IT services major to start up Moonraft in Bangalore. They believe in combining design with technology to create unique apps for clients. And in Ahmedabad, Kirit Gajera of DRC Systems has also staked his future on apps. He started DRC as an IT services company but is now concentrating on building exciting apps for clients. He expects that at some point in the future, the apps business will be his main revenue earner, even though it is currently one-tenth of his IT services business.

These people are not alone in dreaming of making a fortune through developing apps. In India, several hundred thousand companies — both established IT firms as well as startups — are very clear that apps will be ubiquitous in a few years’ time and will be the preferred way of doing everything — from shopping for goods and services to keeping track of security at home and office. The statistics on smartphone sales, app creation and downloads only serve to vindicate their bullishness on the app business.

According to data provided by research firm Nielsen, some 29 million smartphones and five million tablets were bought by Indian consumers in 2012. The smartphone sales for the year represented a jump of 145 per cent over the previous year.

Meanwhile, another financial advisory firm, Avendus, estimates that by 2015, India will have a smartphone population of 382 million (the global smartphone number are estimated to be around 2.2 billion). Of the 382 million, only 50 per cent will be active users of mobile Internet; and, the users will download 45 apps on average annually. Currently, Indians only download 10 apps on average.

In 2012, more than 60 billion apps were downloaded across the world. India accounted for a relatively minuscule 300 million. Research by Gartner estimates that in 2013, global app downloads will cross 102 billion; Indian smartphone and tab users will download over 800 million apps. It is estimated that by 2016, there will be a little over eight billion app downloads in India alone.

For all the mind-boggling numbers though, the app business is not for the faint-hearted. There are too many people chasing too small a pie because the app business has relatively low entry barriers — several entrepreneurs we spoke to estimated that you could create an app startup with an investment of as little as Rs 50 lakh, if you had a good idea and were willing to hire fresh-out-of-college engineers and designers. You do not need particularly expensive hardware or software, and a team as small as 10 engineers is sufficient to start out with.

The fact that giants such as Microsoft actively encourage and incentivise millions of independent software vendors to use their platform and stores also makes it easier for those who do not want to slug it out in the Android & iOS space. Little wonder then that there has been a rush of app startups in the past couple of years. An estimated 300,000 small and medium companies are building apps in India today, and that population is only going to grow.

On the other hand, the pie they are chasing is not all that attractive. The market for paid downloads is practically non-existent in India, and analysts estimate that the annual mobile ad spends in India for “in-app and mobile” advertising — the term used for the ads present in the free apps you are using — currently is just about Rs 300 crore. And, India does not figure in the list of the top 10 countries by ad revenues from apps.

That is precisely why a great many app developers have decided to build their businesses around enterprise clients, and not around individual customers. It is the apps built to order for corporate customers that are providing the bread and butter — and the jam — for the average app company based in India.

Building Apps To Order
Every large company wants an app developed in double quick time. And, it is these companies that are providing the main business for thousands of app developers. Moonraft, for example, got its big break from Reva, makers of India’s first electric car. The automaker — now part of Mahindra & Mahindra — wanted an app that would help engage its customers better. Sreekumar and Somakumar obliged by creating an app with a simple interface, which could help the customer keep track of the vital statistics of the car, including the all-important battery charge indicator. Moonraft today boasts of 25 clients, and a staff of 50. It says it will clock revenues of Rs 5 crore this year.

Meanwhile, for IMI Mobile, a Hyderabad-based mobile data platform, value-added services (VAS) and interactive voice response (IVR) company, the showcase order came from a power distribution company in Mumbai which was trying to tackle corruption in its meter-reading staff. There were suspicions that some meter readers were being paid off by a few customers to falsify readings. IMI created an app which was put on a handheld device to be carried by all meter readers. Once the reader reached a household, he would click on the app which would connect the camera and capture the meter reading and transmit it to the central server. In one stroke, the problem of tampering with meter readings was eliminated. IMI boasts of revenues of Rs 500 crore. It says the enterprise app is part of a larger mobile integration solution and, therefore, revenues from just apps cannot be quantified.

The revenue model of app developers with corporate clients has evolved over time. In the initial days, corporations primarily contacted developers for one-off apps and paid a flat fee. Now, there are four clear business models that are emerging. The first being the time and material model. Here, the developer charges a flat dollar rate per hour. Many in the Indian developer community follow this model.

The second is the scope and milestone model. In this, the developer meets a set deadline and charges a flat fee. Companies like Moonraft and IMI Mobile follow this model. The third is the transaction-based pricing model. Here, the developer gets paid in accordance with the traffic that flows to the app — probably the number of times a customer uses the app. Ad agencies prefer this model and usually have an in-house app development team that also builds a traffic tracking engine.

The fourth model is outcome-based, one where the developer not only builds an app, but takes a percentage of the ad revenue that flows to the app. Here, the developer does not charge any upfront fee and leaves the marketing to the client. The app that Gajera of DRC Systems built for a Renault dealer in Ahmedabad is a perfect example of this. The app — which allows customers to check everything from availability of preferred colour to service slots at the dealership — works by connecting with the ERP (enterprise resource planning) system of the dealer. It is envisaged as a lifecycle management app for the car that the customer purchased, and gives Gajera a recurring revenue stream. Currently, his firm makes just about Rs 12 crore annually. He hopes the app business will scale up.

The enterprise segment seems to be the most lucrative for developers because it involves long-term maintenance contracts and upgrades. Contus, a $1-million mobile app company from Chennai, started just five years ago and now has close to 140 people on its rolls. “In the mobile app business, we talk to the business managers of the enterprise; it is very different from an IT services business,” says Sriram Manoharan, founder of Contus. He adds that while delivering apps for enterprises is challenging, his company is also building expertise in consulting to add to the mobile app business. “The app business works on a pure IT services model with value additions in data analytics, building e-commerce, field force or distributor connect,” explains Manoharan.

Sony is shuttering its computer business, refocusing its TV division on high-end units and laying off 5,000 people. It is also predicting a massive loss of 110 billion yen, or $1.1 billion, for the fiscal year, a drastic change from its prediction three months ago of a 30-billion yen profit ($294 million).

There was a time, long ago, when it looked as if Japanese electronics companies — and foremost among them Sony — would take over the world. But no longer. Apple and Samsung dominate the consumer market for tablets and smartphones, and Sony is now being forced to undergo costly restructuring to survive.

Sony’s TV business has long been a loser. It has cost the electronics giant $7.8 billion over the past decade, according to Reuters. Sony plans to spin it off into a subsidiary company by July of this year, hoping to streamline processes and return it to profitability by the end of the fiscal year ending March 31, 2015.

To some observers, this move could look like preparation for disposing of the TV division altogether. But Sony chief Kazuo Hirai told reporters in Tokyo that “we have absolutely no plan” to sell off the TV business, according to Reuters. The way forward, Hirai thinks, lies in high-end models, especially ultra-high-definition 4K TVs, which have yet to go mainstream.

Sony will be posting a net loss for the fifth time in six years. As part of restructuring, the Japanese electronics maker will let go more than 3 percent of its global work force by March 2015. The company expects the layoffs to save 100 billion yen, or $1 billion, in annual costs. As of September 2013, Sony had 145,800 employees.

Sony’s computer business is also a goner. After spring 2014, when its final lineup of personal computers will launch, Sony will stop manufacturing and selling computers. Its PC business will be sold to Japan Industrial Partners, an investment fund, and about 250 to 300 Sony employees will move to the new company which the fund will set up to manage the PC business.

Even Sony’s successes are somewhat muted. Its Playstation 4 gaming console is on pace to beat sales expectations of 5 million units by the end of March. But this latest iteration of the popular Playstation was so expensive to develop that it will take two years to break even on the console, Sony said.

One Sony division is performing admirably, however. The financial services unit did so well in the fiscal quarter from October to December 2013 that Sony managed to post an operating profit of more than 90 billion yen, nearly twice the previous year’s amount.